Form 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
July 16, 2007
Date of Report (Date of earliest event reported)
NOVASTAR FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Maryland 001-13533 74-2830661
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(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) Identification No.)
8140 Ward Parkway, Suite 300, Kansas City, MO 64114
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(Address of principal executive offices)
(Zip Code)
(816) 237-7000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c)
Section 1--Registrant's Business and Operations
Item 1.01 Entry into a Material Definitive Agreement.
Sale of Convertible Preferred Stock
On July 16, 2007, NovaStar Financial, Inc ("NFI" or the "Company") entered into
a Securities Purchase Agreement (the "Securities Purchase Agreement") pursuant
to which Massachusetts Mutual Life Insurance Company ("MassMutual"), Jefferies
Capital Partners IV L.P., Jefferies Employee Partners IV LLC, and JCP Partners
IV LLC (collectively, "Jefferies Capital Partners," and together with
MassMutual, the "Investors"), purchased for $48,825,000.00 in cash 2,100,000
shares of NFI's 9.00% Series D-1 Mandatory Convertible Preferred Stock, par
value $0.01 per share and initial liquidation preference of $25.00 per share
("Series D-1 Preferred Stock") in a private placement not registered under the
Securities Act of 1933, as amended (the "Securities Act"). NFI intends to use
the proceeds from the sale of the Series D-1 Preferred Stock under the
Securities Purchase Agreement for general working capital. Prior to the
execution of the Securities Purchase Agreement, MassMutual, through certain of
its affiliates, and certain affiliates of Jefferies Capital Partners, owned
771,800 shares and 224 shares of common stock of NFI, par value $0.01 per share
(the "Common Stock"), respectively.
In connection with the purchase of the Series D-1 Preferred Stock pursuant to
the Securities Purchase Agreement, the Investors also committed to purchase up
to $101,175,000.00 of a new series of NFI's convertible preferred securities to
be designated the 9.00% Series D-2 Mandatory Convertible Preferred Stock, par
value $0.01 per share and to have an initial liquidation preference of $25.00
per share (the "Series D-2 Preferred Stock"), to the extent any such shares are
not subscribed for in a planned rights offering of such shares by the Company by
entering into a Standby Purchase Agreement with the Company dated July 16, 2007
(the "Standby Purchase Agreement"). Also in connection with the Securities
Purchase Agreement, the Company entered into a Registration Rights and
Shareholders Agreement dated July 16, 2007 (the "Registration Rights Agreement")
with the Investors that provides the Investors with (i) customary registration
rights with respect to certain shares owned by the Investors as described below;
and (ii) certain other rights, including the right to designate Directors to the
Company's Board of Directors as described below.
Securities Purchase Agreement
The Securities Purchase Agreement contains customary representations, warranties
and covenants by NFI and the Investors. The Securities Purchase Agreement also
obligates NFI to indemnify the Investors, and the Investors to indemnify NFI,
for breaches of certain of the representations and warranties and covenants
contained in the Securities Purchase Agreement, subject to certain limitations
and exceptions set forth in the Securities Purchase Agreement.
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As previously disclosed, NFI intends, in the third quarter of 2007, to declare a
dividend (the "REIT Dividend") in order to satisfy certain requirements to
distribute 2006 taxable income relating to its status as a "real estate
investment trust" ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). Timing of the declaration and distribution of the REIT Dividend
will be determined by the Board of Directors, but federal tax rules for REITs
require that the Company declare dividends based on 2006 taxable income by the
deadline for its tax return, which is September 17, 2007, and distribute those
dividends by year-end.
In the Securities Purchase Agreement, NFI has agreed (1) to declare the REIT
Dividend on or before September 17, 2007, (2) that the record date for the REIT
Dividend will not be before the earlier of (A) the date all of the shares of the
Series D-2 Preferred Stock are purchased in the Rights Offering as described
below or the first business day after the closing of the transactions
contemplated by the Standby Purchase Agreement and (B) December 10, 2007 and (3)
that the REIT Dividend will be distributed in the form of shares of 9% Series E
Mandatory Convertible Preferred Stock, par value $0.01 per share (the "Series E
Preferred Stock"), ranking pari passu with the Series D-1 Preferred Stock and
the Series D-2 Preferred Stock. The terms of the Series E Preferred Stock will
be determined by NFI's Board of Directors.
The Securities Purchase Agreement also requires NFI to take all action required
to amend its Charter, including submitting any such amendment to a vote of its
stockholders, to prohibit any issuance or transfer of NFI's stock if such
issuance or transfer would cause an "ownership change" (as such term is defined
in Section 382(g) of the Code). The purpose of this amendment is to attempt to
preserve under certain circumstances certain net operating loss carryovers and
net unrealized built-in losses of NFI under the Code. In certain instances
described below under the heading "Registration Rights and Shareholders
Agreement," the Investors will be exempt from these transfer restrictions. In
addition, NFI is required under the Securities Purchase Agreement to seek
stockholder approval of certain provisions of the Articles Supplementary for
both the Series D-1 Preferred Stock and the Series D-2 Preferred Stock, which
would adjust the conversion price of the Series D-1 Preferred Stock and the
Series D-2 Preferred Stock to provide certain anti-dilution protection to the
holders thereof upon certain issuances of capital stock by NFI.
In order to facilitate the transactions contemplated by the Securities Purchase
Agreement, NFI's Board of Directors approved a 4 for 1 reverse stock split of
NFI's issued and outstanding shares of Common Stock, to be effective on or about
July 27, 2007. The Board of Directors also exempted the Investors from the share
ownership limitations contained in NFI's Charter in connection with the purchase
by the Investors of the Series D-1 Preferred Stock pursuant to the Securities
Purchase Agreement and the Series D-2 Preferred Stock in connection with the
Rights Offering and the Standby Purchase Agreement and took action necessary to
exempt the purchase of the Series D-1 Preferred Stock and the Series D-2
Preferred Stock (and the Common Stock issuable upon the conversion thereof) by
the Investors from Section 3-602 of the Maryland General
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Corporation Law (Business Combination Statute) and Section 3-702 of the Maryland
General Corporation Law (Control Share Acquisition Statute).
The foregoing is a summary of the terms of the Securities Purchase Agreement.
This summary is qualified in its entirety by reference to the full text of the
Securities Purchase Agreement which is attached hereto as Exhibit 10.1, and is
incorporated herein by reference.
Standby Purchase Agreement and Rights Offering
In connection with the Securities Purchase Agreement, NFI's Board of Directors
approved a rights offering (the "Rights Offering") pursuant to which holders of
NFI's Common Stock and Series D-1 Preferred Stock will receive non-transferable
rights (the "Rights") to purchase shares of the Series D-2 Preferred Stock at a
price of $25.00 per share. The Series D-2 Preferred Stock will be convertible
into NFI's Common Stock as contemplated in the Securities Purchase Agreement.
Pursuant to the Standby Purchase Agreement, and subject to certain conditions,
each of MassMutual and Jefferies Capital Partners has agreed severally to
purchase 50% of the shares of Series D-2 Preferred Stock that remain unsold in
the Rights Offering.
A Form of Articles Supplementary establishing the Series D-2 Preferred Stock is
filed as an Exhibit to the Securities Purchase Agreement, which is attached
hereto as Exhibit 10.1. Prior to the closing of the Rights Offering, NFI will
file final Articles Supplementary with the Maryland State Department of
Assessments and Taxation (the "SDAT") creating the Series D-2 Preferred Stock.
As contemplated in the Securities Purchase Agreement, the Series D-2 Preferred
Stock will rank pari passu with the shares of Series D-1 Preferred Stock, and
will be convertible into the Company's Common Stock at any time, at the option
of the holders, based on the initial conversion price of $7.00 per share ($28.00
post-split), subject to adjustment in the same manner as the Series D-1
Preferred Stock. After three years, the Series D-2 Preferred Stock also would be
convertible into Common Stock at NovaStar's option, under specified
circumstances. At the end of nine years, if not already converted, the Series
D-2 Preferred Stock would mandatorily be converted into shares of Common Stock
at the then current conversion ratio. The Series D-2 Preferred Stock will accrue
cumulative dividends at the rate of 9.0% per annum (payable in kind or in
certain circumstances in cash). The Series D-2 Preferred Stock would initially
be non-voting, but upon receipt of certain state regulatory agency approvals
relating to the acquisition by the Investors of the Series D-1 Preferred Stock
and the Series D-2 Preferred Stock, would have the same voting rights, on an
"as-converted" basis, as holders of NFI's Common Stock.
Pursuant to the Securities Purchase Agreement, NFI has agreed to file with the
Securities and Exchange Commission (the "SEC") a registration statement under
the Securities Act with respect to the Rights, the Series D-2 Preferred Stock,
and the Common Stock issuable upon the conversion of the Series D-2 Preferred
Stock. NFI has agreed with the
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Investors to use its reasonable best efforts to cause such registration
statement to become effective under the Securities Act and to commence the
Rights Offering as promptly as possible, but in no event prior to the time that
NFI files with the SEC its Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2007.
The Standby Purchase Agreement contains customary representations and covenants
of NFI and the Investors. It also contains covenants requiring NFI to, among
other things, make all filings with the SEC necessary to effectuate the Rights
Offering, operate in the ordinary course of business until the closing of the
purchase of shares by the Investors pursuant to the Standby Purchase Agreement
and use its commercially reasonable efforts to obtain, with the Investor's
cooperation, all necessary consents from third parties in connection with the
transactions contemplated by the Standby Purchase Agreement.
The Investors' obligation to purchase the Series D-2 Preferred Stock under the
Standby Purchase Agreement is subject to customary closing conditions,
including, among other things, a registration statement with respect to the
Rights Offering being effective; receipt of all necessary governmental approvals
and third-party consents; NFI's Board of Directors having declared the REIT
Dividend and having set the record date for determination of the stockholders of
NFI entitled to receive payment of the REIT Dividend (which date will be on or
prior to December 31, 2007 but not earlier than the first business day after the
closing under the Standby Purchase Agreement); NFI having taken all actions
necessary to increase the size of its Board of Directors so that the Investors
are able to designate a number of directors as contemplated by the Registration
Rights Agreement and having filled such vacancies with individuals designated by
the Investors in accordance with the Registration Rights Agreement; since the
date of the Standby Purchase Agreement, there not having been an "NFI Material
Adverse Effect" (as defined below); and NFI having complied with the
requirements of the New York Stock Exchange for purposes of reserving for
listing on the exchange the shares of its Common Stock issuable upon conversion
of the Series D-2 Preferred Stock, and such shares of its Common Stock having
been approved for listing subject to official notice of issuance.
An "NFI Material Adverse Effect" is defined under the Standby Purchase Agreement
to mean any event, change, circumstance or effect that individually or in the
aggregate (with other events, changes, circumstances or effects) is or is
reasonably likely to (A) be materially adverse to NFI's ability to perform its
obligations under the Standby Purchase Agreement or the other transaction
documents, or (B) be materially adverse on the financial condition, assets,
liabilities, business or results of operations of NFI and its subsidiaries,
taken as a whole (subject to certain exclusions only in the case of clause (B)
for (i) events, changes, circumstances or effects relating to general economic
or market conditions, so long as such conditions do not have a disproportionate
effect on NFI and its subsidiaries, compared to other companies in the
industries in which NFI and its subsidiaries conduct their business, (ii)
certain extraordinary events such as acts of war, hostilities or natural
disasters, (iii) decreases in the market value or trading volume of NFI's Common
Stock on the New York Stock Exchange or failure by NFI or its subsidiaries to
meet any projections, or budgets so long as, in the case of (iii), no
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underlying event or circumstance that itself constitutes such a material adverse
effect has resulted in or contributed to such decrease in the market value or
trading volume or such failure of any projections or budgets, and (iv) certain
other exceptions).
NFI is required, subject to certain limitations, to indemnify the Investors from
any claims instituted by a third party with respect to the Rights Offering, the
Standby Purchase Agreement or the registration statement, prospectus or other
offering documents issued in connection with the Rights Offering.
The Standby Purchase Agreement may be terminated and the transaction
contemplated thereby abandoned (1) by the mutual consent of NFI and the
Investors; (2) by either Investor or NFI if the other breaches any covenant,
representation or warranty, which breach would cause the failure of certain
conditions precedent to the closing of the transactions under the Standby
Purchase Agreement, if such breach is not capable of cure on or prior to
December 31, 2007; (3) by either Investor if NFI fails to satisfy any other
conditions to the closing under the Standby Purchase Agreement and such failure
cannot be cured on or prior to December 10, 2007; (4) by either Investor if any
updates to NFI's disclosure schedules disclose any matter that has, or would be
reasonably likely to have, an NFI Material Adverse Effect, (5) by either
Investor if the Rights Offering has not commenced by October 25, 2007; (6) by
either Investor if the record date for the REIT Dividend has occurred and/or the
REIT Dividend has been paid; or (7) by NFI or either Investor after January 31,
2008 provided, that the right to terminate the Standby Purchase Agreement under
clauses (3) and (7) will not be available to a party if that party has failed to
fulfill any obligation under the Standby Purchase Agreement and such failure has
materially contributed to the failure of any condition precedent or the closing
of the standby commitment.
The foregoing is a summary of the terms of the Standby Purchase Agreement. This
summary is qualified in its entirety by reference to the full text of the
Standby Purchase Agreement which is attached hereto as Exhibit 10.2, and is
incorporated herein by reference.
Registration Rights and Shareholders Agreement
Under the Registration Rights Agreement, the Investors have the right to request
that NFI register under the Securities Act shares of Series D-1 Preferred Stock
acquired under the Securities Purchase Agreement, shares of Series D-2 Preferred
Stock acquired in the Rights Offering or pursuant to the Standby Purchase
Agreement, if and when issued, shares of Series E Preferred Stock received in
connection with the REIT Dividend, shares of Common Stock issuable upon
conversion thereof, shares of Common Stock acquired by the Investors after the
date of the Registration Rights Agreement, as well as other securities received
by the Investors on account of such securities (collectively, the "Registrable
Securities"), subject to certain limitations. This "demand" registration right
can be exercised twice by each Investor. In addition, so long as NFI is eligible
to register securities on a registration statement on Form S-3, NFI will be
required to file a
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registration statement on Form S-3 with respect to the Registrable Securities
whenever requested by the Investors subject to certain limitations.
Whenever NFI proposes to register any of its securities and the registration
form it intends to use may be used for the resale of any of the Registrable
Securities, the Investors have the right to include the Registrable Securities
they own in such registration statement subject to certain limitations.
Generally, subject to certain limitations, NFI will pay all registration
expenses in connection with registration statements to register the Registrable
Securities. The Registration Rights Agreement also contains customary
indemnities.
The Registration Rights Agreement also grants the Investors certain rights to
designate up to four individuals for election to NFI's Board of Directors
depending on the percentage of shares owned by the Investors. For so long as the
Investors have the right to designate one or more individuals for election to
NFI's Board of Directors, the Registration Rights Agreement provides that the
total authorized number of members of the Board shall be fixed at eight, subject
to adjustment as is necessary to ensure that the Investors can designate the
number of directors that they are entitled to designate under the Registration
Rights Agreement. Subject to applicable law and exchange regulations, each
Investor is also entitled to designate the number of members of each committee
of the Board that is proportionate to such Investor's representation on the
Board. In lieu of designating members of the Board, the Investors have the right
to designate "board observers" who will receive, subject to certain exceptions,
all materials that are provided to Board members and will be entitled to attend,
but not vote at, all Board meetings. In addition, each Investor shall be
entitled to appoint up to two board observers who will be entitled to attend
board meetings of NFI's subsidiaries.
The Registration Rights Agreement further provides that so long as any Investor
owns at least 25% of the shares of Series D-1 Preferred Stock purchased pursuant
to the Securities Purchase Agreement, the Investors have the right, in addition
to any other voting rights granted under applicable law or the Charter or Bylaws
of NFI, to approve (1) any Change of Control (as defined in the Registration
Rights Agreement), any Liquidation Event (as defined in the Registration Rights
Agreement) or any voluntary bankruptcy of NFI or its subsidiaries unless, in
each case, the Investors receive certain amounts of proceeds in connection with
such transactions as set forth in the Registration Rights Agreement; (2) subject
to certain exceptions, including the consummation of the stock issuances
contemplated under the transaction documents, the creation, authorization, or
issuance of, or the increase in, the authorized amount of, any Series D-1
Preferred Stock, any Series D-2 Preferred Stock, or any series of capital stock
that ranks pari passu with the Series D-1 Preferred Stock or Series D-2
Preferred Stock, or any capital stock of any subsidiary of NFI, or any
obligation or security convertible into, or exercisable or exchangeable for,
such stock; (3) any amendment of any terms of the Series D-1 Preferred Stock or
the Series D-2 Preferred Stock; (4) any reclassification of any authorized
shares of NFI into Series D-1 Preferred Stock, Series D-2 Preferred Stock, any
securities that rank pari passu with the Series D-1 Preferred Stock or Series
D-2 Preferred Stock or any obligation
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or security convertible into, or excisable for, such stock; (5) except as
provided in the Registration Rights Agreement, any change in the number of, or
method of electing, any directors or any members of any committee of the Board;
(6) NFI's entering into or amending any transactions with any affiliates of NFI
other than wholly owned subsidiaries that are not on an arms-length basis; and
(7) the consummation of any transaction that could or could reasonably be
expected to, individually or in the aggregate, adversely affect the rights,
privileges or preferences of the Investors, as holders of NFI's shares of
capital stock.
The Registration Rights Agreement provides that if there is a recapitalization
of NFI's Common Stock (other than a subdivision, combination or merger or sale
of assets transaction provided for elsewhere in the Registration Rights
Agreement) a provision will be made so that the Investors will be entitled to
receive upon conversion of any Convertible Shares (as defined below) the number
of securities or property of NFI to which a holder of Common Stock deliverable
upon conversion would have been entitled on such recapitalization. In any such
case, appropriate adjustments are required to be made to the Convertible Shares
and NFI's organizational documents relating to such Convertible Shares
(including adjustments to the conversion price and the number of shares issuable
upon the conversion of the Convertible Shares) so that after the
recapitalization, the securities outstanding shall be as nearly equivalent as
practical to the Convertible Shares immediately prior to such recapitalization.
Further, the Registration Rights Agreement prohibits NFI from avoiding or
seeking to avoid the observance or performance of any terms of the Registration
Rights Agreement, the Articles Supplementary for the Series D-1 Preferred Stock
or Articles Supplementary for the Series D-2 Preferred Stock and requires NFI at
all times in good faith to assist in carrying out the provisions of the
Registration Rights Agreement, the Articles Supplementary for the Series D-1
Preferred Stock and the Articles Supplementary for the Series D-2 Preferred
Stock, and to take all action necessary to protect the Investors against
dilution or other impairment.
In addition, for so long as each Investor owns 25% or more of the shares of
Series D-1 Preferred Stock it purchased pursuant to the Securities Purchase
Agreement, if NFI issues or sells any shares of Common Stock, Common Share
Equivalents (as defined in the Registration Rights Agreement) or Debt Securities
(as defined in the Registration Rights Agreement), the Investors shall have the
preemptive right, subject to certain limitations, to purchase a number of such
securities equal to the percentage of shares of Common Stock on a fully diluted
basis owned by the Investors immediately prior to such sale.
In addition, upon a Change of Control (as defined in the Registration Rights
Agreement), the Investors have the right to require NFI to redeem all or a
portion of their Series D-1 Preferred Stock purchased pursuant to the Securities
Purchase Agreement, the Series D-2 Preferred Stock purchased by the Investors in
connection with the Rights Offering or the Standby Purchase Agreement or, if and
when issued, any Series E Preferred Stock (collectively, the "Convertible
Shares"), at a price equal to the greater of (1) the aggregate liquidation
preference of the shares or (2) an amount equal to $37.50, less all cash
dividends paid on such shares, subject to adjustment in the event of a stock
split or
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combination. In the event there shall occur a sale of all or substantially all
of NFI's assets or any other Change of Control in which NFI is not the surviving
entity, each Investor is entitled to receive securities of the acquiring entity
in form and substance substantially similar to the Convertible Shares, to the
extent it did not elect to have its Convertible Shares redeemed. In addition,
prior to any Change of Control, NFI is required to ensure that after the Change
of Control each Investor will have the right to acquire and receive such shares
of stock, securities or assets that would have been issued or payable in such
Change of Control with respect to the Common Stock issuable upon conversion of
the Investor's Convertible Shares as of the date of the Change of Control.
The Articles Supplementary for the Series D-1 Preferred Stock and the Series D-2
Preferred Stock contain certain transfer restrictions intended to preserve NFI's
status as a REIT and under certain circumstances certain net operating loss
carryovers and net unrealized built-in losses for NFI under the Code. Under the
Registration Rights Agreement, NFI's Board irrevocably waived certain of such
transfer restrictions imposed (or to be imposed) on the Series D-1 Preferred
Stock and the Series D-2 Preferred Stock by the Articles Supplementary for such
series owned by the Investors or any of their respective affiliates so long as
the Investors or any such affiliate did not know that a particular transfer
would result in a substantial limitation on NFI's use of net operating loss
carryovers and net unrealized built-in losses under the Code. The Board did not
waive the transfer restrictions intended to preserve NFI's status as a REIT. In
addition, the Board irrevocably waived certain of these transfer restrictions
imposed (or to be imposed) by the Articles Supplementary for the Series D-1
Preferred Stock and the Series D-2 Preferred Stock with respect to Shares of
Series D-1 Preferred Stock and Series D-2 Preferred Stock owned by the Investors
or any of their respective affiliates in connection with transfers by the
Investors or any of their respective affiliates (1) pursuant to a registered
public offering or a sale through a broker, dealer or market-maker pursuant to
Rule 144 promulgated under the Securities Act; (2) to affiliates of the
Investors or any of their respective affiliates; (3) pursuant to transactions
approved by NFI's Board, and (4) pursuant to the Rights Offering or under the
Standby Purchase Agreement. The Board also waived, with respect to the Investors
and their respective affiliates, the application of any other restrictions
(except as may be required by law) that may be in effect from time to time on
the transfer, sale or other disposition of shares of capital stock of NFI that
are similar in nature to the transfer restrictions imposed on the Series D-1
Preferred Stock or the Series D-2 Preferred Stock by the Articles Supplementary
of such series whether such restrictions are set forth in NFI's Charter or any
other agreement.
The foregoing is a summary of the terms of the Registration Rights Agreement.
This summary is qualified in its entirety by reference to the full text of the
Registration Rights Agreement which is attached hereto as Exhibit 10.3, and is
incorporated herein by reference.
The disclosure under the heading "5.02 Departures of Directors or Certain
Officers; Election of Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers" is incorporated herein by reference.
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Section 3 - Securities and Trading Markets
Item 3.02 Unregistered Sales of Equity Securities.
As discussed in "Item 1.01 Entry into a Material Definitive Agreement", on July
16, 2007, NFI sold 2,100,000 shares of Series D-1 Preferred Stock for
$48,825,000.00 in cash to the Investors. The Series D-1 Preferred Stock was
issued by NFI in a private placement pursuant to an exemption from the
registration requirements of the Securities Act provided by Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated under the Securities Act
("Regulation D") as the offer and sale of the Series D-1 Preferred Stock were
made to four "accredited investors" as defined by Regulation D. Appropriate
restrictive legends were affixed to the certificates representing the Series D-1
Preferred Stock.
In addition, shares to be sold to the Investors pursuant to their exercise of a
subscription in the Rights Offering or pursuant to the Standby Purchase
Agreement will be similarly sold on the basis of the exemption provided by
Section 4(2) of the Securities Act and Rule 506 of Resolution D. The shares of
Series D-2 Preferred Stock to be acquired by the Investors will contain a
similar restrictive legend.
The Series D-1 Preferred Stock is convertible into Series D-2 Preferred Stock or
Common Stock as described under "Item 5.03 Amendments to Articles of
Incorporation or Bylaws; Change in Fiscal Year," which description is
incorporated herein by reference. The Series D-2 Preferred Stock is to be
convertible into Common Stock as described in "Item 1.01 Entry into a Material
Definitive Agreement," which description is incorporated herein by reference.
Item 3.03 Material Modification to Rights of Security Holders
On July 16, 2007, NFI filed the Articles Supplementary for the Series D-1
Preferred Stock with the Maryland SDAT, which became effective upon filing. The
Articles Supplementary define the rights of the Series D-1 Preferred Stock.
Pursuant to the Articles Supplementary, the shares of Series D-1 Preferred Stock
issued pursuant to the Securities Purchase Agreement have certain rights as to
conversion, liquidation and adjustment to conversion price. In addition, the
Registration Rights Agreement establishes certain additional rights of the
Investors. The disclosures under the headings "Item 1.01 Entry into a Material
Definitive Agreement" and "Item 5.03 Amendments to Articles of Incorporation or
Bylaws; Change in Fiscal Year" are incorporated herein by reference.
Section 5--Corporate Governance and Management
Item 5.02. Departures of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain Officers
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On July 16, 2007, NFI, the Investors and each of Scott Hartman, Lance Anderson
and Mike Bamburg (collectively, the "Executives," and each an "Executive")
entered into an agreement in principle with respect to certain incentive
compensation to be paid to the Executives (each a "Letter Agreement"). Pursuant
to the Letter Agreements, the parties agreed that (1) awards to the Executives
under the NovaStar Financial, Inc. Executive Bonus Plan will be paid in
restricted stock in a manner consistent with the Executive's existing
compensation arrangements with NFI; (2) each Executive would receive options to
purchase 1,000,000 shares of NFI's Common Stock with an exercise price equal to
the weighted average conversion price of the Series D-1 Preferred Stock and the
Series D-2 Preferred Stock owned by the Investors (following the issuance of the
REIT Dividend), which options will vest on the third anniversary of the Letter
Agreement and be forfeited if the Executive is not continuously employed with
NFI through the third anniversary of the date of the Letter Agreement; and (3)
the Executives will not be entitled to any long-term incentive awards under
NFI's employee benefit plans for three years from the date of the Letter
Agreement (collectively, the "Compensation Arrangements"). The Compensation
Arrangements remain subject to approval by NFI's Board of Directors and
shareholders, as applicable, and completion of definitive documentation. In the
event it is not possible to effectuate the Compensation Arrangements as
contemplated by the Letter Agreements, the Executives and the Investors agreed
to negotiate in good faith compensation awards that are equivalent in terms of
the economic value, risk and reward retention characteristics and commitment to
the long-term growth in equity value to the Compensation Arrangements. In
addition, in the Letter Agreement, the Executives agreed, subject to certain
exceptions, not to sell or enter into any contract or arrangement with the
effect of selling any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock for three years from the date of
the Letter Agreement without the prior consent of the Investors.
The foregoing is a summary of the terms of the Letter Agreements. This summary
is qualified in its entirety by reference to the full text of the Letter
Agreements which are attached hereto as Exhibits 10.4, 10.5, and 10.6 and are
incorporated herein by reference.
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
Series D-1 Preferred Stock
On July 16, 2007, NFI filed Articles Supplementary with the Maryland SDAT, which
became effective upon filing, creating the Series D-1 Preferred Stock.
The Articles Supplementary for the Series D-1 Preferred Stock provide for the
following:
Designation and number. The number of shares of Series D-1 Preferred Stock is
2,100,000 and the par value per share is $0.01.
Ranking. The Series D-1 Preferred Stock will rank, with respect to payment of
dividends and distribution of assets upon liquidation, (1) senior to the Common
Stock and each
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other class or series of capital stock of NFI the terms of which do not
expressly provide that such class or series ranks senior to or pari passu with
the Series D-1 Preferred Stock as to the payment of dividends and distribution
of assets upon a liquidation; (2) pari passu with NFI's shares of 8.90% Series C
Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"), the Series
D-2 Preferred Stock, the Series E Preferred Stock, if and when issued, and each
other class or series of shares of NFI, the terms of which expressly provide
that such class or series ranks pari passu with the Series D-1 Preferred Stock
as to payment of dividends and distribution of assets upon a liquidation; and
(3) junior to each other class or series of shares of NFI the terms of which
expressly provide that such class or series ranks senior to the Series D-1
Preferred Stock as to payment of dividends and distributions of assets upon a
liquidation.
Dividends. The Series D-1 Preferred Stock will accrue cumulative dividends which
shall accumulate daily, whether or not such dividends have been declared and
whether or not there are profits, surplus or other funds of NFI legally
available for the payment of cash dividends, at the rate of 9.00% per annum
payable semi-annually in cash. No dividends or distributions (other than stock
dividends or distributions) can be made with respect to any capital stock which
ranks junior to or ranks pari passu with the Series D-1 Preferred Stock and no
redemptions or repurchases of any such capital stock can be made unless all
dividends on the Series D-1 Preferred Stock and all stock ranking pari passu
with the Series D-1 Preferred Stock have been declared and paid or set aside for
payment. The Series D-1 Preferred Stock is also entitled to participate in any
dividends paid on the Common Stock on an as-converted basis.
Liquidation Preference. In the event of a liquidation of NFI, a holder of the
Series D-1 Preferred Stock will be entitled to receive, prior and in preference
to any payment or distribution of assets to holders of Common Stock or shares
ranking junior to the Series D-1 Preferred Stock, but after any distribution on
any shares ranking senior to the Series D-1 Preferred Stock, an amount equal to
the greater of the liquidation preference attributable to the Series D-1
Preferred Stock or an amount that the holder would have been entitled to receive
if it had exercised its rights to convert its Series D-1 Preferred Stock into
Common Stock immediately prior to liquidation. The liquidation preference
attributable to the Series D-1 Preferred Stock corresponds to an amount equal to
$25.00, subject to adjustment in the event of a stock split or combination, plus
all accumulated but unpaid dividends on the Series D-1 Preferred Stock.
Voting Rights. The Series D-1 Preferred Stock is entitled to vote on an
as-converted basis with the Common Stock. The prior consent of holders of 2/3 of
the outstanding shares of Series D-1 Preferred Stock is required for NFI to: (1)
subject to certain exceptions, create, authorize or issue, or increase the
authorized amount of, any Series D-1 Preferred Stock, any stock ranking pari
passu with the Series D-1 Preferred Stock or any stock ranking senior to the
Series D-1 Preferred Stock or any obligation or security convertible into, or
exercisable or exchangeable for, such stock; (2) approve or make any amendment
to the terms of the Series D-1 Preferred Stock; (3) amend, alter change, repeal
or waive any provision of NFI's Charter or Bylaws that would adversely affect
the rights of the Series D-1 Preferred Stock; (4) reclassify any authorized
shares of NFI into any
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Series D-1 Preferred Stock, any stock ranking pari passu with or senior to the
Series D-1 Preferred Stock or any obligation or security convertible into such
stock; or (5) consummate any transaction that could, or could reasonably be
expected to, individually or in the aggregate, adversely affect or impair the
rights and preferences of the Series D-1 Preferred Stock.
Conversion. The Series D-1 Preferred Stock is convertible into Common Stock at
any time at the option of the holders. The Series D-1 Preferred Stock sold to
the Investors under the Securities Purchase Agreement is initially convertible
into 7,500,000 shares of Common Stock based upon the initial conversion price of
$7.00 per share, which conversion price is subject to adjustment as provided in
the Articles Supplementary for the Series D-1 Preferred Stock. If NFI has not
obtained stockholder approval for certain adjustments to the conversion price of
the Series D-1 Preferred Stock and Series D-2 Preferred Stock designed to
provide certain anti-dilution protection to the holders of such stock upon
certain issuances of capital stock by NFI (the "Shareholder Approval") on or
prior to the third anniversary of the issuance of the Series D-1 Preferred
Stock, NFI can convert all of the D-1 Preferred Stock into Common Stock, if at
such time NFI's common stock is publicly traded and the Common Stock price is
greater than 200% of the then existing conversion price for 40 of 50 consecutive
trading days preceding delivery of the forced conversion notice. If NFI has not
obtained Shareholder Approval on or prior to the ninth anniversary of the
issuance of the Series D-1 Preferred Stock, the Series D-1 Preferred Stock will
automatically convert into shares of Common Stock. In addition, if NFI has
obtained Shareholder Approval, the shares of Series D-1 Preferred Stock will
automatically convert into shares of Series D-2 Preferred Stock on the second
anniversary of issuance or such later date when NFI obtains the Shareholder
Approval.
Transfer Restrictions. The Series D-1 Preferred Stock is subject to certain
transfer restrictions intended to attempt to preserve NFI's status as a REIT and
under certain circumstances certain net operating loss carryovers and net
unrealized built-in losses for NFI under the Code. In certain instances
described above under the heading "Item 1.01 Entry into a Material Definitive
Agreement-Registration and Rights Shareholders Agreement," the Investors will be
exempt from these transfer restrictions.
Appraisal Rights. Holders of Series D-1 Preferred Stock will not have appraisal
rights.
The foregoing is a summary of the terms of the Series D-1 Preferred Stock. This
summary is qualified in its entirety by reference to the Articles Supplementary
for the Series D-1 Preferred Stock which are attached hereto as Exhibit 4.1, and
are incorporated herein by reference.
Series D-2 Preferred Stock
Prior to the closing of the Rights Offering and Standby Purchase Agreement, NFI
will file Articles Supplementary with the Maryland SDAT creating the Series D-2
Preferred Stock. A form of the Articles Supplementary for the Series D-2
Preferred Stock is
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included herein as an Exhibit to the Securities Purchase Agreement, which is
attached hereto as Exhibit 10.1.
Important Information
The commencement of the Rights Offering described herein is subject to certain
conditions, principally the effectiveness of a registration statement filed with
the SEC. This report does not constitute an offer to sell or the solicitation of
any offer to buy any securities in the Rights Offering, nor shall there be any
sale of securities in any state in which such offer, solicitation or sale would
be unlawful prior to the registration or qualification under the securities of
any such states. The Rights Offering will only be made by means of a prospectus
pursuant to an effective registration statement.
An overview of the process regarding the distribution and exercise of the Rights
will be the subject of a separate report when the Company proceeds with the
Rights Offering, and the details will be the subject of a registration statement
and prospectus.
The sale of the Series D-1 Preferred Stock has not been registered, and the sale
of the Series D-2 Preferred Stock to be sold to MassMutual and Jefferies Capital
Partners will not be registered, under the Securities Act of 1933, as amended,
and such securities may not be offered or sold in the United States absent
registration or an applicable exemption. The Company has entered into a
Registration Rights Agreement with the Investors with respect to these
securities.
Forward Looking Statements
This Current Report and the Exhibits attached hereto contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, regarding management's beliefs, estimates, projections, and
assumptions with respect to, among other things, NFI's ability to consummate the
transactions contemplated by this Current Report and the Exhibits attached
hereto, future income, dividends, operations, business plans and strategies, as
well as industry and market conditions, all of which are subject to change at
any time without notice. Actual results and operations for any future period may
vary materially from those projected herein and from past results. Some
important factors that could cause actual results to differ materially from
those anticipated include: NFI's ability to consummate the transactions as
described in this Current Report and the Exhibits attached hereto; NFI's ability
to generate sufficient liquidity on favorable terms; NFI's ability to sell loans
it originates in the market place; the size, frequency and structure of NFI's
securitizations; impairments on NFI's mortgage assets; increases in prepayment
or default rates on NFI's mortgage assets; increases in loan repurchase
requests; inability of potential borrowers to meet NFI's underwriting
guidelines; changes in assumptions regarding estimated loan losses and fair
value amounts; finalization of the amount and terms of any severance provided to
terminated employees; finalization of the accounting impact of previously
announced reduction in workforce; events impacting the subprime mortgage
industry in general,
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including events impacting NFI's competitors and liquidity available to the
industry; the initiation of margin calls under NFI's credit facilities; the
ability of NFI's servicing operations to maintain high performance standards and
maintain appropriate ratings from rating agencies; NFI's ability to generate
acceptable origination volume while maintaining an acceptable level of overhead;
the stability of residual property values; NFI's continued status as a REIT;
interest rate fluctuations on NFI's assets that differ from its liabilities; the
outcome of litigation or regulatory actions pending against NFI or other legal
contingencies; NFI's compliance with applicable local, state and federal laws
and regulations or opinions of counsel relating thereto and the impact of new
local, state or federal legislation or regulations or opinions of counsel
relating thereto or court decisions on NFI's operations; compliance with new
accounting pronouncements; the impact of general economic conditions; NFI's
ability to adapt to and implement technological changes; NFI's ability to
successfully integrate acquired business or assets with its existing business;
and the risks that are from time to time included in NFI's filings with the SEC,
including its Annual Report on Form 10-K, for the year ended December 31, 2006,
and its quarterly report on Form 10-Q, for the period ending March 31, 2007.
Other factors not presently identified may also cause actual results to differ.
Words such as "believe," "expect," "anticipate," "promise," "plan," and other
expressions or words of similar meanings, as well as future or conditional verbs
such as "will," "would," "should," "could," or "may" are generally intended to
identify forward-looking statements. This Current Report speaks only as of its
date and NFI expressly disclaims any duty to update the information herein.
Section 9-Financial Statements and Exhibits
Item 9.01 Financial Statement and Exhibits
(d) Exhibits. The following are filed as Exhibits to this Report:
Exhibit No. Document
4.1 Articles Supplementary 9.00% Series D-1 Mandatory Convertible
Preferred Stock (Par Value $0.01 Per Share).
10.1 Securities Purchase Agreement, dated July 16, 2007, by and among
NovaStar Financial, Inc., Massachusetts Mutual Life Insurance
Company, Jefferies Capital Partners IV L.P., Jefferies Employee
Partners IV LLC and JCP Partners IV LLC.
10.2 Standby Purchase Agreement, dated July 16, 2007, by and among
NovaStar Financial, Inc., Massachusetts Mutual Life Insurance
Company, Jefferies Capital Partners IV L.P., Jefferies Employee
Partners IV LLC and JCP Partners IV LLC.
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Exhibit No. Document
10.3 Registration Rights and Shareholders Agreement, dated July 16,
2007, by and among NovaStar Financial, Inc., Massachusetts Mutual
Life Insurance Company, Jefferies Capital Partners IV L.P.,
Jefferies Employee Partners IV LLC and JCP Partners IV LLC.
10.4 Letter Agreement, dated July 16, 2007, by and among NovaStar
Financial, Inc., Massachusetts Mutual Life Insurance Company,
Jefferies Capital Partners IV L.P., Jefferies Employee Partners
IV LLC and JCP Partners IV LLC, and Scott Hartman.
10.5 Letter Agreement, dated July 16, 2007, by and among NovaStar
Financial, Inc., Massachusetts Mutual Life Insurance Company,
Jefferies Capital Partners IV L.P., Jefferies Employee Partners
IV LLC and JCP Partners IV LLC, and Lance Anderson.
10.6 Letter Agreement, dated July 16, 2007, by and among NovaStar
Financial, Inc., Massachusetts Mutual Life Insurance Company,
Jefferies Capital Partners IV L.P., Jefferies Employee Partners
IV LLC and JCP Partners IV LLC, and Mike Bamburg.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVASTAR FINANCIAL, INC.
DATE: July 20, 2007 /s/ Gregory S. Metz
-----------------------------------------
Gregory S. Metz
Chief Financial Officer
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Index To Exhibits
Exhibit No. Document
4.1 Articles Supplementary 9.00% Series D-1 Mandatory Convertible
Preferred Stock (Par Value $0.01 Per Share).
10.1 Securities Purchase Agreement, dated July 16, 2007, by and among
NovaStar Financial, Inc., Massachusetts Mutual Life Insurance
Company, Jefferies Capital Partners IV L.P., Jefferies Employee
Partners IV LLC and JCP Partners IV LLC.
10.2 Standby Purchase Agreement, dated July 16, 2007, by and among
NovaStar Financial, Inc., Massachusetts Mutual Life Insurance
Company, Jefferies Capital Partners IV L.P., Jefferies Employee
Partners IV LLC and JCP Partners IV LLC.
10.3 Registration Rights and Shareholders Agreement, dated July 16,
2007, by and among NovaStar Financial, Inc., Massachusetts Mutual
Life Insurance Company, Jefferies Capital Partners IV L.P.,
Jefferies Employee Partners IV LLC and JCP Partners IV LLC.
10.4 Letter Agreement, dated July 16, 2007, by and among NovaStar
Financial, Inc., Massachusetts Mutual Life Insurance Company,
Jefferies Capital Partners IV L.P., Jefferies Employee Partners
IV LLC and JCP Partners IV LLC, and Scott Hartman.
10.5 Letter Agreement, dated July 16, 2007, by and among NovaStar
Financial, Inc., Massachusetts Mutual Life Insurance Company,
Jefferies Capital Partners IV L.P., Jefferies Employee Partners
IV LLC and JCP Partners IV LLC, and Lance Anderson.
10.6 Letter Agreement, dated July 16, 2007, by and among NovaStar
Financial, Inc., Massachusetts Mutual Life Insurance Company,
Jefferies Capital Partners IV L.P., Jefferies Employee Partners
IV LLC and JCP Partners IV LLC, and Mike Bamburg.
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